Dalian iron ore rebounds after two-day drop, but outlook shaky

Chinese iron ore futures climbed nearly 3 percent on Thursday to recover from a two-day drop, but prices appear vulnerable to more weakness ahead as supply increases both inside and outside China.

Goldman Sachs expects major global iron ore miners to add another 10 million tonnes to the seaborne market in the third quarter and smaller producers would also contribute slightly.

But China’s domestic iron ore mines, many of which were shut by the years-long decline in prices, appear to be more resilient than before, with output rising in May for the first time in two years, the U.S. bank said in a note.

“We do not think this growth is sustainable as most producers are once again operating at a loss, but this modest increase in domestic output will compete with imported ore and is likely to add pressure on seaborne prices in the second half of 2016,” Goldman said.

The most-traded iron ore on the Dalian Commodity Exchange was up 2.9 percent at 369 yuan ($56) a tonne by midday, after earlier rising as far as 372 yuan.

China is at a seasonally slow period for steel demand as construction activity weakens during summer, limiting appetite for ingredient iron ore as supply increases.

Output curbs in the top steelmaking city of Tangshan to improve air quality during an international conference there this week lifted Shanghai rebar futures to a five-week high on Monday. But prices have fallen since.

Still, Goldman estimated the production loss from the Tangshan cuts may be material, equivalent to 1.3 million tonnes of crude steel.

“However, looking beyond the conference, we see limited downstream activity to support steel prices,” the bank said.

Construction-used rebar on the Shanghai Futures Exchange rose 1 percent to 2,095 yuan a tonne, but below Monday’s five-week top of 2,189 yuan.

Appetite for spot iron ore cargoes has been lean this week, traders said, citing wide gaps between bids and offers.

Iron ore for immediate delivery to China’s Tianjin port .IO62-CNI=SI fell 1.2 percent to $50.20 a tonne on Wednesday, the lowest since June 3, according to The Steel Index.

While the spot benchmark has found strong short-term support around $50, ANZ commodity strategist Daniel Hynes said it may be “susceptible to being broken through if the Chinese housing market weakens”.